Thinking about getting into the Coffee Business?
Coffee franchises are hands down one of the most lucrative food service businesses you can invest in.
Americans consume over 500 million cups of coffee daily. With billions of dollars flowing through the industry each year…there’s lots of room for new businesses to thrive.
But…
Not all food service businesses are created equal.
Some franchises will drain your bank account. Others will skyrocket to success.
Let’s talk about numbers.
You’ll learn:
- Why the Coffee Shop Industry is Booming
- Why Franchise Numbers Are Unique
- Numbers That Matter vs. Cute Stats Designed To Impress You
- How to Analyze Potential Investment Opportunities
Why the Coffee Shop Industry is Booming
Hold onto your mug, cause the coffee industry is literally exploding right now.
Reported industry revenue grew 6.5% over the last five years with expectations to reach $72.8 billion in revenue by 2025. Billion. With a B.
But wait…there’s more.
Industry trends show that sale amounts and transaction sizes will continue to grow as customers develop habitual coffee drinking routines and continue to pay premium prices for their daily cups.
Coffee runs aren’t going anywhere.
Customers craving coffee will gladly pay top dollar for their morning cup o’ joe. That means millions of customers pouring into your local coffee shop every morning.
And this is where investors come in.
Profit = Demand – Supply.
As the coffee industry continues to grow at such rapid rates, investors have the opportunity to capitalize on high demand.
But another thing to keep in mind…
When you make a coffee shop franchise investment, you’re not just selling cups of coffee. You’re buying into an existing system that will help you claim your market share.
Why Franchise Numbers Are Unique
Imagine running your own coffee shop.
You sign the lease. Buy all the supplies. Hire a few employees. And figure out marketing on your own.
Scary thought right?
While some independent coffee shops succeed, the majority don’t make it past year five.
Franchises take that guesswork out of the equation.
According to Franchise Business Review, only 10% of franchises fail within the first few years. Compare that to roughly 60% of independent startups closing within 5 years and you’ll see why franchises tend to perform better.
It’s simple math really…
60 coffee shop owners drop their ball. But only 10 franchise owners do.
That’s a huge difference.
Here are few reasons why:
- Coffee Shop Franchises come with built-in brand recognition. Customers will come to your shop because they know your brand.
- Streamlined operations. You won’t have to reinvent the wheel because everything you need to know is spelled out in black and white.
- Franchise businesses have group purchasing power which helps cut down on supply costs.
- Training programs for staff and business owners.
- Franchise headquarters helps support you every step of the way.
Essentially, your franchise headquarter is giving you a blueprint for success. All you have to do is follow their lead.
Numbers That Matter vs. Cute Stats Designed To Impress You
Every franchise opportunity is not worth your time.
Thankfully, there are certain numbers you can review before handing over your money.
Here are some numbers that should matter to you before buying a coffee shop franchise.
Gross Profit Margins
Most coffee franchises disclose their average gross profit margins within their Franchise Disclosure Document.
Typically those numbers range from 75%-80% of sales.
Why are profit margins so high in the coffee industry?
Well it all comes down to the cost of goods.
Coffee beans aren’t expensive. If you sell a cup of coffee for $5, it might only cost you less than $0.50 in raw goods. That right there my friend is a profit maker.
Initial Investment
Initial investment will vary from franchise to franchise.
You’ll find coffee shop opportunities that require $500,000+ and others that require less than $100,000.
Just because a franchise opportunity requires you to invest $10,000 doesn’t mean you should take the leap.
It’s important to calculate what you can expect in return for your initial investment. A $500,000 franchise that makes $200,000 per year will outperform a $50,000 franchise that only makes $15,000.
Average Unit Volume
Another number that will be disclosed to you in the FDD is your Average Unit Volume.
This gives you an idea of how much revenue an average location is making.
You always want to watch for franchises that have steadily increased their AUV over the past couple of years. If it’s on the decline, that could be a red flag.
Franchisee Retention Rate
Here’s a number that pretty much tells you everything you need to know.
Approximately 90% of franchisees renew their contract with the franchisor.
If franchise owners have access to information that tells them the business isn’t profitable, they won’t renew their contract when it’s up.
When doing your research, ask how many franchisees have renewed with the brand.
If the number is low, there’s probably a high turnover rate and you’ll want to dig a little deeper.
How to Evaluate Your Investment Potential
Feelin’ analytically thirsty?
Let’s review the steps you should take when evaluating your investment potential.
Review the Franchise Disclosure Document
This document will tell you everything you need to know about the franchise.
Be sure to look over Item 19 (Financial Performance) and Item 20 (Number of Units). These items will paint a realistic picture of the company’s performance.
Talk to Current Franchise Owners
Need I say more.
Contact your local franchise owners and ask them how it is to work with the franchisor. How long did it take them to break even? Were there any unforeseen costs? Would they do it again?
The inside scoop is always worth more than a sales pitch.
Calculate your break-even point.
Your break even point will let you know how much you need to make in sales to cover all of your costs.
Once you have that number. Find out what the current franchisees are making on average.
If your break even is higher than 90% of franchisees. Keep looking.
Understand Market Trends
Lifestyle-centric coffee shops located in densely populated areas will perform better than your typical coffee shop located inside of a strip mall.
Make sure you understand the market you will be buying into before taking the leap.
Conclusion
Restaurant franchises are a great way to get into the coffee industry.
With proven systems and industry projections showing continued growth through the next decade, investors have a lot to gain by buying a coffee shop franchise.
But don’t just take our word for it.
As with any business opportunity, you should always do your due diligence.
Those who take the time to understand and analyze the numbers before investing will set themselves up for success.